Geographic inequalities in higher education accessibility

Update: Now open for comments. (Novice error!)

As Leaving Certificate students take their seats this morning to start their final examinations, it is timely to consider how where they live (and often where they were born) can impact on a range of higher education decisions and outcomes and why these might matter for their futures. According to previous research, Ireland has reasonably good overall geographic accessibility to higher education institutions (HEIs) in terms of travel distance, though there are large areas from which an individual would have to travel, say, 75kms or more to their nearest HEI. These areas tend to be more rural with relatively low population densities and with a finite number of HEIs some inequality in access is of course inevitable.

But not all HEIs are the same. If we distinguish by type of HEI, then the pattern of geographic inequality is very different. In particular, if we consider distance to nearest university as another measure of accessibility, then geographic accessibility inequalities are much more pronounced, with relatively poor access in much of the south-east, south-west, west, north-west and along the border.

Such inequalities matter for a number of reasons, particularly in terms of the impact of geographic accessibility on whether school leavers progress to higher education and, if they do so, where and what they choose to study. Indeed, this is the focus of an on-going programme of research I am conducting jointly with Darragh Flannery (UL) and Sharon Walsh (NUI Galway). For example, this paper showed that greater travel distances were associated with lower participation rates for school leavers from lower social classes, all else equal. It also highlighted how these distance effects resulted in differential higher education participation rates across social classes and that the effects of distance were most pronounced for lower-ability students from poorer backgrounds.

Importantly, distance also matters for where and what students study, suggesting possible inefficiencies in matching students to courses. For example, a separate piece of work found that geographic accessibility plays an important role in determining outcomes relating to HEI type, degree level and field of study, with students living further from a university much more likely to study at an institute of technology (IT), all else equal. The paper argues that these decisions are important in terms of future labour market outcomes such as employment rates and earnings for school leavers.

The pursuit of equity in access to higher education is claimed to be central to education policy in Ireland. Although much of the focus has been on narrowing the social class differential in participation, spatial factors are now finally being acknowledged as a potential barrier to access.  In a consultation paper on the development of a National Plan for Equity of Access to Higher Education 2015-2019, the Higher Education Authority highlighted the strong geographic dimension to higher education participation.

At present, one of the main policy responses to address inequities in access is the ‘student grant scheme’, which includes maintenance grants, fee grants and postgraduate contributions. The maintenance grant scheme is a contribution towards a student’s living costs and eligibility is based on meeting certain criteria based on parental income levels and means, as well as travel distance from a student’s chosen HEI.  Thus, the grant system explicitly acknowledges the potential impact that travel distance can have on higher education related decisions.  The current grant eligibility limit for the so-called adjacent (partial) grant is 45kms or less (up from 24kms in 2012), while the non-adjacent (full) grant applies to those living more than 45kms from the approved institution.  Thus, two otherwise comparable students, one living 50kms from her chosen institution, the other living 250kms away, would receive the same financial aid.

The results from our studies suggest that consideration should be given to establishing a more flexible or stepwise higher education grant system, with progressively higher payments for those living further away. As it currently stands with a single distance cut-off of 45kms, the maintenance grant system does not take into account that significantly longer travel times could have important implications for students in terms of financial costs, but also in terms of their available time to engage in paid employment to perhaps support their studies. Of course, any revised system would need to be carefully designed in order to avoid unnecessary transaction costs, as well as imposing perverse incentives for students to travel further than necessary.

Finally, one area of current policy likely to impact on geographic accessibility is the proposed consolidations in the Irish higher education sector, with a number of ITs to be possibly amalgamated into new technological universities. In a paper published last week, we used a variety of techniques and measures to consider the effects of the proposed re-structuring on both the level of, and inequalities in, geographic accessibility to university education.  Overall we found that the north-west and areas of the west, south-west and border are poorly serviced in terms of absolute and relative accessibility to university education both pre- and post-policy reform.  These areas consistently remain in the bottom quintile of each measure of accessibility considered, implying that the impact of the reforms for those regions will be negligible.  On a more positive note, we did find that the percentage of the 17-19 year old cohort (a good proxy for the population of school leavers) who live more than 100kms to their nearest university would fall from 14.5% to 7.9% post-reform.  However, the same analysis showed that there would remain a significant minority living more than 150kms from a university.  Overall we concluded that “the reform will do little to remove geographical impediments to university participation for those that are most disadvantaged [currently] from a spatial standpoint.”  This assertion is also supported by the inequality analysis, which shows little improvement in overall geographic inequality in university accessibility across Ireland as a result of the consolidation reform.

So, as Leaving Certificate students take their seats today, it is worth stressing that the choice set facing many of them in terms of their higher education opportunities is very much a function of where they live. For resource-constrained students in particular, the distance impediment is not adequately addressed through current policies. Unfortunately, changes to the grant system rarely feature in the debate around the financing of higher education. Any move to an alternative financing system would provide an ideal opportunity to address this issue.

Sports Economics Workshop

The 2nd sportseconomics.org Workshop will be held on Friday 22nd of July 2016 at University College Cork. The purpose of this workshop is to discuss and stimulate interdisciplinary research ideas from those working in the areas of economics, sport, coaching, public health, management, and related fields from Ireland and abroad.

The keynote address will be delivered by Rodney Fort, Professor of Sport Management at the University of Michigan.

Other confirmed presenters include Professor Rob Simmons, University of Lancaster and Professor Paul Downward, Loughborough University.

The workshop is free and those interested in attending should register here. The full programme will be available shortly.

This event is kindly funded by the Irish Research Council Government of Ireland “New Foundations” Scheme.

Mortgage term as a credit condition

The aim of this post is to introduce the topic of mortgage term to maturity in an Irish setting. I will outline how mortgage terms were highly pro-cyclical during the pre-2008 expansion, and that they were used by credit-hungry borrowers to make high-leverage strategies more affordable on a monthly basis. It is well established that credit conditions, as measured by Loan to Value ratios (LTV), Loan to Income ratios (LTI) and Debt Service Ratios (DSR, ratio of monthly repayments to net income) reached unsustainable levels in Ireland in the run-up to the 2008 crash.[1]  By contrast terms have received much less attention. Previous work by McCarthy and McQuinn (2013) on Irish credit conditions is the only piece known to me which contains an analysis of mortgage terms. They show that median terms increased rapidly in the 2000-2008 period, and did not decrease after the housing market crash. Further, they show that terms were higher for First Time Buyers, and that longer terms are correlated with an easing in other credit conditions. Today’s post concerns recent analysis carried out by my colleague Edward Gaffney which looks at the distribution of mortgage terms for loans originated between 1997 and 2014.

Why should mortgage terms be of interest to us? Firstly, they can have a huge impact on mortgage affordability. Identical loans, for identical houses, to people with identical incomes, at identical interest rates, can have widely varying monthly repayments driven by varying terms. As a simple example, a loan for €250,000 at an annual rate of 4.5 per cent has a monthly repayment of €1,581 when taken out over 20 years, which falls to €1,183 when that loan is extended to 35 years. A saving not to be sniffed at!

Secondly, they appear to have associations with risk-taking behaviour. Research from Central Bank colleagues[2] has shown that, controlling for a range of factors associated with higher credit risk, mortgages with longer terms are more likely to default, even though a longer term allows for a lower monthly mortgage repayment, all else equal!

Finally, terms also have a big impact on banks’ profitability, as longer term loans will have higher lifetime interest income for the bank. Further, longer terms allow banks to make larger loans while continuing to respect any Debt Service to Income rules that may be in place.

So what can we say about mortgage terms in Ireland? In all that follows, I will focus on the First Time Buyer (FTB) segment of the mortgage market. Our first figure (Fig 1) provides clear evidence from Edward’s work that mortgage terms lengthened significantly during the boom phase in Ireland. Of the 1997 cohort still outstanding in 2014, 60 per cent were originated with terms of 20 years or less, with 90 per cent having terms under 25 years. At the turn of the millennium, the 35 year mortgage was close to non-existent. However, its proliferation through the period of rapid credit growth was quite remarkable, moving to a market share of roughly 50 per cent by 2006-07, with a further 5 per cent of the market taking terms between 35 and 40 years.

While Kelly, McCann and O’Toole (2015) report that credit conditions tightened considerably in the aftermath of the financial crisis, Edward’s chart shows that “credit tightening” in mortgage terms has been much less stark, with 60 per cent of mortgages originated in 2014 still having terms above 30 years.

Fig 1: The distribution of originated mortgage terms per year, First Time Buyer segment 1997 to 2014.

term_line

This evidence of a structural shift towards longer terms begs a number of questions relating to the role of term as a credit condition. Figure 2a from Edward’s work provides conclusive evidence that, during the boom phase, longer terms were associated with higher leverage. In 2007, those taking out 40 year mortgages had an average LTV of over 90, with LTVs of 85, 72, 60 and 50 as we move in five-yearly intervals down to 20 year mortgages. While these LTVs have converged since the crisis, the rank ordering persists. Figure 2b completes the picture by showing that borrowers on different terms have in fact been accessing similarly valued houses, which implies of course that those with longer terms were taking out larger average loans. Taken together, these figures strongly suggest that term was being used by FTBs to mount the property ladder at as high a point as possible for a given down-payment amount, using higher originating LTVs to access valuable housing with small down-payments and large loans, while easing the monthly repayment burden of this high-leverage strategy via longer terms.

Figure 2: Average LTV and property value for mortgages originating at different terms.

(a)    LTV (b)   Average Property Value
 term_ltv  term_val

Our next piece of evidence links borrowers’ incomes to mortgage terms. Figure 3 reports clear differences in originating Loan to Income ratios (LTI) across term groups. Those on 40 year mortgages in 2007 were accessing loans with an average LTI of 5, while the equivalent number was under 3 for those with 20 year mortgages, again providing strong evidence that mortgage terms were used as part of a broad “credit conditions package” by credit-hungry borrowers. Figure 3(b) confirms that this highly-indebted strategy was in fact more common among high-income borrowers in the run-up to 2008, with median incomes falling as terms shorten. The one exception to this rule is the 40-year mortgage, which appears to have been popular among lower-income households with extremely high LTIs during its short existence.

Figure 3: Average LTI and income for mortgages originating at different terms.

(a)    Loan to Income ratios (b)   Incomes (median)
 term_lti  term_inc

So where did this “credit condition package” leave borrowers on a monthly basis? It is unclear from the above whether long terms acted to offset the affordability difficulties brought on by high-leverage strategies. To do this, Edward calculates a monthly repayment to gross income (RTI) ratio for each loan in the data, applying an indicative opening interest rate. The evidence is conclusive: despite the fact that longer terms mechanically improve mortgage affordability by lowering repayments all other things equal, it was still the case up to 2008 that borrowers with longer terms were taking out such large loans that their RTIs were in fact higher than borrowers with shorter terms. This is likely part of the explanation for the finding of Kelly, O’Malley and O’Toole (2015) that longer-term mortgages have higher default probabilities, even after controlling for a range of explanatory factors.

More posts on the mortgage market in Ireland to follow over the coming months.

[1] McCarthy and McQuinn (2013) and Kelly, McCann and O’Toole (2015)

[2] Kelly, O’Malley and O’Toole (2015)

Teaching macro after the crisis

Olivier Blanchard, pound for pound one of the best macroeconomists out there, is revising his famous textbook. His experience at the IMF has forced him to reconsider the basic short- to medium-term models we teach.

In particular Blanchard wants to keep the ‘IS’ curve, which relates savings to investment, and mostly dump the ‘LM’ curve, which supposedly connects the demand for real balances to the interest rate via the money supply. He also wants to ditch the aggregate supply and demand model, which relates changes in aggregate demand and supply to employment and expectations over the medium term.

Blanchard wants to scrap this and connect the IS curve to an older idea, the Philips Curve, which will be paired with a new curve, called the MP curve in many formulations. Karl Whelan, formerly of this parish, has a nice exposition of the whole IS-MP-PC system here (.pdf). This should replace the older IS-LM and AS-AD formulations over time, but for that to happen, lecturers will need to update their notes, and textbook authors will need to update their offerings. We know Blanchard is doing his bit. What about our Irish colleagues?

A while ago Brian Lucey and I looked at how much the teaching of economics had changed in Ireland since the crisis. Not much, was the short answer. The presentation of our initial results is here (.ppt).

The next thing to do is to change how economists are taught about finance. I have quite a few thoughts on this, perhaps best expressed in my own teaching about financial economics, but Blanchard’s suggestions around the introduction of more than one interest rate reminds me a lot of this classic paper by Jack Treynor, and maybe that can be worked in, in a sensible way.

Either way, Blanchard’s textbook will be top of my recommended reading list when it comes out.

DEW/TCD policy conference on housing & homelessness.

The Dublin Economics Workshop, in association with the Policy Institute at Trinity College Dublin, is organising a half-day event from 9 to 12 next Wednesday (June 8), entitled Homelessness & Social Housing: Policy Solutions for Ireland.

Minister for Housing Simon Coveney will open the event, after which there will be a keynote by Professor Dan O’Flaherty (Columbia), a world expert on homelessness and low-income housing. Eoin O’Sullivan (TCD) and Michelle Norris (UCD, HFA) are also presenting, before Cathal O’Connell (UCC) moderates an open discussion.

The event is free and open to all. To ensure adequate capacity (both venue and refreshments!), if you intend to attend the event, please register here. More details on the event are here [PDF].

The Brexit Debate – EU Integration or Disintegration?

The School of Social Science & Philosophy at Trinity College Dublin is hosting a Brexit debate, on Thursday 9th of June at 6pm. Speakers include economists John O’Hagan and Michael Wycherley (nationalities Irish and English, respectively!), as well as Will Phelan (Political Science) and Francis Jacobs (ex-European Parliament). More details, including how to register for this free event, are here.